Canada: Court of Appeal for Ontario Finds Another Termination Clause Unenforceable
Mr. Andros had worked for Colliers, a large commercial real estate company, for eight years when, in January of 2017, the employer terminated his employment without cause. As Managing Director, Mr. Andros worked under a written contract of employment and received both a base salary and an annual bonus. With respect to his bonus entitlement, the bonus plan stipulated that Mr. Andros was required to be an employee “in good standing” at the time that the bonus was payable in order to receive a bonus.
Upon termination, Colliers provided Mr. Andros with his minimum entitlements under the Ontario Employment Standards Act, 2000 (the “ESA”) in accordance with the termination clause. Mr. Andros did not meet the requirement of being an employee in good standing in February of 2018 (when the 2017 bonus became payable) and therefore Colliers did not provide Mr. Andros with any amounts for 2017 under the bonus plan. Mr. Andros sued for wrongful dismissal, arguing that the termination clause was not enforceable and that he was entitled to reasonable notice of termination at common law. Mr. Andros further argued that he was entitled to a prorated portion of his 2017 bonus for the duration of the common law reasonable notice period.
On summary judgement, the motion judge agreed with Mr. Andros, finding that the termination clause was not enforceable and that Mr. Andros was entitled to eight months of reasonable notice of termination. In doing so, the motion judge found that the termination clause purported to provide less than the minimum entitlements under the ESA by not explicitly providing for severance pay under one of the subclauses, and not explicitly providing for the continuation of benefits during the statutory notice period under another subclause. The motion judge also found that Mr. Andros was entitled to a prorated share of the 2017 bonus for the eight-month notice period, notwithstanding the fact that the 2017 bonus became payable in February of 2018, almost six months after the expiry of the reasonable notice period.
On appeal, the Ontario Court of Appeal agreed with the motion judge and found that the termination clause was unenforceable. Second, the Court found that the termination clause was unclear or could be interpreted in more than one way. In such cases, the Court held, the interpretation that favours the employee should be preferred. Finally, the Court held that the reference to compensation and benefits continuing during the working notice period and the absence of any reference to compensation and benefits had the effect of contracting out of the ESA’s guarantee of benefit continuation during the statutory notice period. Therefore, the Court held that the termination clause was unenforceable as it purported to contract out of the ESA.
The Court of Appeal also agreed with the motion judge with respect to bonus entitlement. The Court held that Mr. Andros was entitled to receive a prorated share of his annual bonus, notwithstanding the fact that the eight-month notice period had expired when the 2017 bonus became payable in February of 2018. Mr. Andros was awarded prorated damages for the portion of the 2017 bonus that he earned prior to his termination, as well as a prorated portion of the 2017 bonus for the eight-month notice period. The Court made a significant distinction between “earning” and “receiving” a bonus. The Court found that an employee may earn a bonus before it becomes payable. Accordingly, the Court found that an employee should be compensated for any bonus amounts that were earned or would have been earned during the notice period. The Court found that “inherent unfairness” would arise if the employee did not receive a prorated share of the bonus that they had earned during the notice period, regardless of when the bonus became payable. The Court did, however, helpfully state that it is possible to contract out of damages for loss of a bonus during the notice period, but that in order to do so effectively, the contract would need to be clear and unambiguous. The Court ruled that the contract at issue in this case did not meet this threshold.
This case adds to the complexity of the existing body of case law on the enforceability of contractual termination clauses in Ontario. This latest decision highlights the need for a careful and deliberate approach when preparing employment contracts.
We would like to thank Jessica Fay for contributing this article.
